SEP 17, 2015 @ 04:31 PM
A few people on the Street thought that China did not matter to the Fed’s rate decision this month. It looks like China mattered more to chairwoman Janet Yellin than most people anticipated. While the market expected the Fed to keep rates steady on Thursday, China’s slowdown adding to that decision may have caught some by surprise.
China matters.
According to State Street Global Advisors chief economist Christopher Probyn, the Federal Reserve’s governors now find themselves in the same situation as many investors: waiting to determine the real severity of China’s economic slowdown, and whether it has the potential to push the global economy into recession next year.
“Unlike the Fed, the Chinese government at least has the policy ammunition to try to steer its economy to a softer landing,” says Probyn. The question now for investors, and for the U.S. Fed, is whether China will succeed at it.

Last week, Chinese billionaire Ronnie Chan, chairman of Hang Lung Properties, told FORBES on the sidelines of the Yalta European Strategy conference in Kyiv that Beijing is not sure what to do with the slowdown. “I don’t think that the government knows where is the inflection point on supporting the economy,” he said. “They have done a lot of things, but I don’t think it’s anything that will help in the near-term. A lot of things like One Belt One Road and promoting entrepreneurship are all great things for China and the world, but this is long term. China is struggling to find something.”
After months of speculation, the Fed chose not to hike interest rates today. Worries about China and the violent late-summer market reaction there have the Fed seeing things differently.
The World Bank released a report this week saying emerging markets would see serious outflows if the Fed raised interest rates and investors choose to park their cash in safer — and now higher yielding — U.S. bonds.
The bank’s report said that if investors started to expect more hikes to follow, it would drive up long-term bond yields in emerging markets already watching their currencies shrink against the dollar. Over the last year, Brazil and Russia have lost investment grade status by at least one U.S. credit rating firm. According to the World Bank, a one percentage point rise in U.S., euro area, U.K. and Japanese yields could cut capital inflows to emerging and frontier economies by 45% within a year.
For them, thank God for China.
The risk that Fed policy actions could further tip the scales of slowing global growth appears to outweigh its ongoing desire to give itself more policy flexibility by moving short-term interest rates off their currently zero-bound trajectory.
What happens now that the Fed rates remain unchanged? Likely a two fold reaction will take place, says Adam Sarhan, founder of Sarhan Capital in New York.
“We will all be happy that the easy money is here to stay, but on the other hand the Fed is telling you that they don’t think the economy is strong enough to handle even a 25 basis points increase,” Sarhan says. “If the Fed is afraid of a recession, where will global growth come from? You have near zero rates here. You have northern Europe with negative rates. If the global economy can’t go up with easy money and buy Chinese goods, then it raises the question where the growth is really coming from. Investors will start thinking that the economy is not as good as we thought it was.”
 
http://www.forbes.com/sites/kenrapoza/2015/09/17/for-the-federal-reserve-china-matters/